A St. Louis-based investment adviser and its affiliate agreed to pay $893,502 to settle charges laid by the Securities and Exchange Commission (SEC) regarding failure to disclose conflicts of interest to their advisory clients over eight years.
The SEC charged Huntleigh Advisors and affiliate Datatex Investment Services with violating federal securities law from 2015-22 by not properly disclosing conflicts related to transaction fees, revenue sharing payments, mutual fund share class selection practices that generated fees, and failing to report some of these fees to the SEC, the agency said Monday in an administrative proceeding.
The SEC also said Huntleigh and Datatex breached their duty of care, including best execution for practices regarding the recommendation of mutual fund shares.
The SEC’s two Republican commissioners objected to the settlement, arguing the agency overstepped its authority in charging the firms with violating the best execution rule.
“There is no legal authority cited in the commission order for the finding that mutual fund share class selection implicates an investment adviser’s duty to seek best execution,” said Commissioners Hester Peirce and Mark Uyeda in their dissenting opinion. “… Incorrectly applying an adviser’s fiduciary duty to a specific type of conduct is more than a matter of semantics. The ripple effect has tangible detrimental consequences for all regulated entities. The commission only should allege violations that are supported by adequate legal authority.”
Huntleigh and Datatex did not admit or deny the SEC’s charges but agreed to pay penalties, cease and desist from future violations, and be censured. Of the monetary total, $608,251 represented disgorgement of ill-gotten gains and another $105,251 represented prejudgment interest. Huntleigh agreed to distribute funds to harmed investors.
Huntleigh and Datatex failed to adopt adequate policies and procedures to avoid SEC rule violations on conflicts of interest and investment selection, according to the agency’s order.
As part of the settlement, Huntleigh and Datatex agreed to remedial measures to address the violations, including evaluating, reviewing, and updating its policies and procedures related to conflicts of interest and investment selection; reviewing and correcting all relevant disclosure documents; evaluating and moving clients who might be better served in a lower cost share class or fund; and notifying all clients affected by the alleged violations.
The companies have 40 days to certify, in writing, the status of the firm’s compliance improvements and policy changes as outlined in the order.
Huntleigh did not respond to a request for comment.